IR35 Changes – Is Your Business Ready?
In her latest blog Employment Law Solicitor, Emma Spandrzyk, discusses the recent IR35 changes; what it is and what is changing….
What is IR35?
IR35 refers to the off-payroll working rules that aim to ensure that contractors doing work for companies, and the companies themselves, are paying the correct level of tax.
HMRC introduced IR35 to tackle what it calls ‘disguised’ employment. It is essentially an employment status test for tax, which works out whether a contract points towards employment or self-employment.
IR35 – What Is Changing?
From 6 April 2021, certain businesses will be affected by a change to the existing IR35 rules meaning that some self-employed contractors, and the businesses that hire them will have to pay tax differently.
Under the current rules, the contractor is responsible for working out whether they fall inside or outside IR35. If they are inside IR35 (in other words it points towards employment), the contractor needs to pay the tax and NIC’s due.
However, from 6 April this is set to change. If your business engages self-employed contractors or people through personal service companies and those people are in fact found to be employees, then your business will be liable to pay tax and NIC’s in respect of those individuals.
The changes will affect businesses with more than 50 employees or a turnover of more than £10.2m. They do not apply to small businesses but there is a chance that these provisions could be extended to include these at some point in the future.
The change was due to take place in April 2020 but was delayed because of the Covid-19 pandemic. They have however been in place in the public sector since 2017.
How Can I Tell If Someone Falls Inside IR35?
If you are a business covered by the new rules, the first thing you should do is identify and review the arrangements of the contractors that you engage.
A range of factors then need to be considered in respect of each arrangement to determine the status of these contractors and whether they could be deemed as falling inside IR35.
For each assessment, criteria including the following should be considered:
- The degree of supervision, direction and control of the contractor. For example, how much say does your business have over the way the contractor completes the work and do you dictate working patterns;
- Personal service offered by the contractor. In other words, does the contractor undertake the work themselves or can they appoint a substitute in their place?
- Mutuality of obligation – is there an obligation for your business to offer work and does the contractor have to accept it?
What Are The Implications For Your Business?
If your business is caught by the new rules, you will need to review all existing contractor arrangements carefully as it will be your responsibility to show that you have taken reasonable care when working out IR35 status. If you fail to do this, HMRC will hold your businesses to account for the failure.
There is a tool on the HMRC website (‘CEST’) to assist with assessments and this can be accessed from:
https://www.gov.uk/guidance/check-employment-status-for-tax
Once you have concluded the individual assessments, contractors should be given the reasons behind the decision, specifically on whether they are deemed inside or outside IR35, in a Status Determination Statement. The contractor can then dispute the decision if they disagree with it.
A record should be kept of all determinations to justify your assessments just in case HMRC have cause to look into them at some point in the future.
For clarification on whether you are taxing staff appropriately, we would recommend speaking directly to your accountant.
For further advice on the upcoming changes or employment status generally, please contact Emma Spandrzyk in our employment team. Emma can be contacted on: e.spandrzyk@timms-law.com or on freephone 0800 011 6666.
Emma Spandrzyk
March 2021